G.R. No.

123498 November 23, 2007

BPI FAMILY BANK, Petitioner,

vs.
AMADO FRANCO and COURT OF APPEALS, Respondents.

DECISION

NACHURA, J.:

Banks are exhorted to treat the accounts of their depositors with meticulous care and utmost
fidelity. We reiterate this exhortation in the case at bench.

Before us is a Petition for Review on Certiorari seeking the reversal of the Court of Appeals (CA)
Decision1 in CA-G.R. CV No. 43424 which affirmed with modification the judgment 2 of the
Regional Trial Court, Branch 55, Manila (Manila RTC), in Civil Case No. 90-53295.

This case has its genesis in an ostensible fraud perpetrated on the petitioner BPI Family Bank
(BPI-FB) allegedly by respondent Amado Franco (Franco) in conspiracy with other
individuals,3 some of whom opened and maintained separate accounts with BPI-FB, San
Francisco del Monte (SFDM) branch, in a series of transactions.

On August 15, 1989, Tevesteco Arrastre-Stevedoring Co., Inc. (Tevesteco) opened a savings and
current account with BPI-FB. Soon thereafter, or on August 25, 1989, First Metro Investment
Corporation (FMIC) also opened a time deposit account with the same branch of BPI-FB with a
deposit of ₱100,000,000.00, to mature one year thence.

Subsequently, on August 31, 1989, Franco opened three accounts, namely, a

current,4 savings,5 and time deposit,6 with BPI-FB. The current and savings accounts were
respectively funded with an initial deposit of ₱500,000.00 each, while the time deposit account
had ₱1,000,000.00 with a maturity date of August 31, 1990. The total amount of ₱2,000,000.00
used to open these accounts is traceable to a check issued by Tevesteco allegedly in
consideration of Franco’s introduction of Eladio Teves, 7 who was looking for a conduit bank to
facilitate Tevesteco’s business transactions, to Jaime Sebastian, who was then BPI-FB SFDM’s
Branch Manager. In turn, the funding for the ₱2,000,000.00 check was part of the ₱80,000,000.00
debited by BPI-FB from FMIC’s time deposit account and credited to Tevesteco’s current account
pursuant to an Authority to Debit purportedly signed by FMIC’s officers.

It appears, however, that the signatures of FMIC’s officers on the Authority to Debit were
forged.8 On September 4, 1989, Antonio Ong,9 upon being shown the Authority to Debit,
personally declared his signature therein to be a forgery. Unfortunately, Tevesteco had already
effected several withdrawals from its current account (to which had been credited the
₱80,000,000.00 covered by the forged Authority to Debit) amounting to ₱37,455,410.54, including
the ₱2,000,000.00 paid to Franco.

On September 8, 1989, impelled by the need to protect its interests in light of FMIC’s forgery claim,
BPI-FB, thru its Senior Vice-President, Severino Coronacion, instructed Jesus Arangorin 10 to
debit Franco’s savings and current accounts for the amounts remaining therein. 11 However,
Franco’s time deposit account could not be debited due to the capacity limitations of BPI-FB’s
computer.12

1
In the meantime, two checks13 drawn by Franco against his BPI-FB current account were
dishonored upon presentment for payment, and stamped with a notation "account under
garnishment." Apparently, Franco’s current account was garnished by virtue of an Order of
Attachment issued by the Regional Trial Court of Makati (Makati RTC) in Civil Case No. 89-4996
(Makati Case), which had been filed by BPI-FB against Franco et al.,14 to recover the
₱37,455,410.54 representing Tevesteco’s total withdrawals from its account.

Notably, the dishonored checks were issued by Franco and presented for payment at BPI-FB
prior to Franco’s receipt of notice that his accounts were under garnishment. 15 In fact, at the time
the Notice of Garnishment dated September 27, 1989 was served on BPI-FB, Franco had yet to
be impleaded in the Makati case where the writ of attachment was issued.

It was only on May 15, 1990, through the service of a copy of the Second Amended Complaint in
Civil Case No. 89-4996, that Franco was impleaded in the Makati case. 16 Immediately, upon
receipt of such copy, Franco filed a Motion to Discharge Attachment which the Makati RTC
granted on May 16, 1990. The Order Lifting the Order of Attachment was served on BPI-FB on
even date, with Franco demanding the release to him of the funds in his savings and current
accounts. Jesus Arangorin, BPI-FB’s new manager, could not forthwith comply with the demand
as the funds, as previously stated, had already been debited because of FMIC’s forgery claim. As
such, BPI-FB’s computer at the SFDM Branch indicated that the current account record was "not
on file."

With respect to Franco’s savings account, it appears that Franco agreed to an arrangement, as a
favor to Sebastian, whereby ₱400,000.00 from his savings account was temporarily transferred to
Domingo Quiaoit’s savings account, subject to its immediate return upon issuance of a certificate
of deposit which Quiaoit needed in connection with his visa application at the Taiwan Embassy.
As part of the arrangement, Sebastian retained custody of Quiaoit’s savings account passbook to
ensure that no withdrawal would be effected therefrom, and to preserve Franco’s deposits.

On May 17, 1990, Franco pre-terminated his time deposit account. BPI-FB deducted the amount
of ₱63,189.00 from the remaining balance of the time deposit account representing advance
interest paid to him.

These transactions spawned a number of cases, some of which we had already resolved.

FMIC filed a complaint against BPI-FB for the recovery of the amount of ₱80,000,000.00 debited
from its account.17 The case eventually reached this Court, and in BPI Family Savings Bank, Inc.
v. First Metro Investment Corporation,18 we upheld the finding of the courts below that BPI-FB
failed to exercise the degree of diligence required by the nature of its obligation to treat the
accounts of its depositors with meticulous care. Thus, BPI-FB was found liable to FMIC for the
debited amount in its time deposit. It was ordered to pay ₱65,332,321.99 plus interest at 17% per
annum from August 29, 1989 until fully restored. In turn, the 17% shall itself earn interest at 12%
from October 4, 1989 until fully paid.

In a related case, Edgardo Buenaventura, Myrna Lizardo and Yolanda Tica (Buenaventura, et
al.),19 recipients of a ₱500,000.00 check proceeding from the ₱80,000,000.00 mistakenly credited
to Tevesteco, likewise filed suit. Buenaventura et al., as in the case of Franco, were also
prevented from effecting withdrawals20 from their current account with BPI-FB, Bonifacio Market,
Edsa, Caloocan City Branch. Likewise, when the case was elevated to this Court docketed as BPI
Family Bank v. Buenaventura,21 we ruled that BPI-FB had no right to freeze Buenaventura, et al.’s
accounts and adjudged BPI-FB liable therefor, in addition to damages.

2
Meanwhile, BPI-FB filed separate civil and criminal cases against those believed to be the
perpetrators of the multi-million peso scam.22 In the criminal case, Franco, along with the other
accused, except for Manuel Bienvenida who was still at large, were acquitted of the crime of
Estafa as defined and penalized under Article 351, par. 2(a) of the Revised Penal
Code.23 However, the civil case24 remains under litigation and the respective rights and liabilities
of the parties have yet to be adjudicated.

Consequently, in light of BPI-FB’s refusal to heed Franco’s demands to unfreeze his accounts
and release his deposits therein, the latter filed on June 4, 1990 with the Manila RTC the subject
suit. In his complaint, Franco prayed for the following reliefs: (1) the interest on the remaining
balance25 of his current account which was eventually released to him on October 31, 1991; (2)
the balance26 on his savings account, plus interest thereon; (3) the advance interest 27 paid to him
which had been deducted when he pre-terminated his time deposit account; and (4) the payment
of actual, moral and exemplary damages, as well as attorney’s fees.

BPI-FB traversed this complaint, insisting that it was correct in freezing the accounts of Franco
and refusing to release his deposits, claiming that it had a better right to the amounts which
consisted of part of the money allegedly fraudulently withdrawn from it by Tevesteco and ending
up in Franco’s accounts. BPI-FB asseverated that the claimed consideration of ₱2,000,000.00 for
the introduction facilitated by Franco between George Daantos and Eladio Teves, on the one
hand, and Jaime Sebastian, on the other, spoke volumes of Franco’s participation in the
fraudulent transaction.

On August 4, 1993, the Manila RTC rendered judgment, the dispositive portion of which reads as
follows:

WHEREFORE, in view of all the foregoing, judgment is hereby rendered in favor of [Franco] and
against [BPI-FB], ordering the latter to pay to the former the following sums:

1. ₱76,500.00 representing the legal rate of interest on the amount of ₱450,000.00 from May 18,
1990 to October 31, 1991;

2. ₱498,973.23 representing the balance on [Franco’s] savings account as of May 18, 1990,
together with the interest thereon in accordance with the bank’s guidelines on the payment
therefor;

3. ₱30,000.00 by way of attorney’s fees; and

4. ₱10,000.00 as nominal damages.

The counterclaim of the defendant is DISMISSED for lack of factual and legal anchor.

Costs against [BPI-FB].

SO ORDERED.28

Unsatisfied with the decision, both parties filed their respective appeals before the CA. Franco
confined his appeal to the Manila RTC’s denial of his claim for moral and exemplary damages,
and the diminutive award of attorney’s fees. In affirming with modification the lower court’s
decision, the appellate court decreed, to wit:

3
WHEREFORE, foregoing considered, the appealed decision is hereby AFFIRMED with
modification ordering [BPI-FB] to pay [Franco] ₱63,189.00 representing the interest deducted
from the time deposit of plaintiff-appellant. ₱200,000.00 as moral damages and ₱100,000.00 as
exemplary damages, deleting the award of nominal damages (in view of the award of moral and
exemplary damages) and increasing the award of attorney’s fees from ₱30,000.00 to ₱75,000.00.

Cost against [BPI-FB].

SO ORDERED.29

In this recourse, BPI-FB ascribes error to the CA when it ruled that: (1) Franco had a better right to
the deposits in the subject accounts which are part of the proceeds of a forged Authority to Debit;
(2) Franco is entitled to interest on his current account; (3) Franco can recover the ₱400,000.00
deposit in Quiaoit’s savings account; (4) the dishonor of Franco’s checks was not legally in order;
(5) BPI-FB is liable for interest on Franco’s time deposit, and for moral and exemplary damages;
and (6) BPI-FB’s counter-claim has no factual and legal anchor.

The petition is partly meritorious.

We are in full accord with the common ruling of the lower courts that BPI-FB cannot unilaterally
freeze Franco’s accounts and preclude him from withdrawing his deposits. However, contrary to
the appellate court’s ruling, we hold that Franco is not entitled to unearned interest on the time
deposit as well as to moral and exemplary damages.

First. On the issue of who has a better right to the deposits in Franco’s accounts, BPI-FB urges us
that the legal consequence of FMIC’s forgery claim is that the money transferred by BPI-FB to
Tevesteco is its own, and considering that it was able to recover possession of the same when the
money was redeposited by Franco, it had the right to set up its ownership thereon and freeze
Franco’s accounts.

BPI-FB contends that its position is not unlike that of an owner of personal property who regains
possession after it is stolen, and to illustrate this point, BPI-FB gives the following example: where
X’s television set is stolen by Y who thereafter sells it to Z, and where Z unwittingly entrusts
possession of the TV set to X, the latter would have the right to keep possession of the property
and preclude Z from recovering possession thereof. To bolster its position, BPI-FB cites Article
559 of the Civil Code, which provides:

Article 559. The possession of movable property acquired in good faith is equivalent to a title.
Nevertheless, one who has lost any movable or has been unlawfully deprived thereof, may
recover it from the person in possession of the same.

If the possessor of a movable lost or of which the owner has been unlawfully deprived, has
acquired it in good faith at a public sale, the owner cannot obtain its return without reimbursing the
price paid therefor.

BPI-FB’s argument is unsound. To begin with, the movable property mentioned in Article 559 of
the Civil Code pertains to a specific or determinate thing.30 A determinate or specific thing is one
that is individualized and can be identified or distinguished from others of the same kind. 31

4
In this case, the deposit in Franco’s accounts consists of money which, albeit characterized as a
movable, is generic and fungible.32 The quality of being fungible depends upon the possibility of
the property, because of its nature or the will of the parties, being substituted by others of the
same kind, not having a distinct individuality.33

Significantly, while Article 559 permits an owner who has lost or has been unlawfully deprived of a
movable to recover the exact same thing from the current possessor, BPI-FB simply claims
ownership of the equivalent amount of money, i.e., the value thereof, which it had mistakenly
debited from FMIC’s account and credited to Tevesteco’s, and subsequently traced to Franco’s
account. In fact, this is what BPI-FB did in filing the Makati Case against Franco, et al. It staked its
claim on the money itself which passed from one account to another, commencing with the forged
Authority to Debit.

It bears emphasizing that money bears no earmarks of peculiar ownership, 34 and this
characteristic is all the more manifest in the instant case which involves money in a banking
transaction gone awry. Its primary function is to pass from hand to hand as a medium of exchange,
without other evidence of its title.35 Money, which had passed through various transactions in the
general course of banking business, even if of traceable origin, is no exception.

Thus, inasmuch as what is involved is not a specific or determinate personal property, BPI-FB’s
illustrative example, ostensibly based on Article 559, is inapplicable to the instant case.

There is no doubt that BPI-FB owns the deposited monies in the accounts of Franco, but not as a
legal consequence of its unauthorized transfer of FMIC’s deposits to Tevesteco’s account.
BPI-FB conveniently forgets that the deposit of money in banks is governed by the Civil Code
provisions on simple loan or mutuum.36 As there is a debtor-creditor relationship between a bank
and its depositor, BPI-FB ultimately acquired ownership of Franco’s deposits, but such ownership
is coupled with a corresponding obligation to pay him an equal amount on demand. 37 Although
BPI-FB owns the deposits in Franco’s accounts, it cannot prevent him from demanding payment
of BPI-FB’s obligation by drawing checks against his current account, or asking for the release of
the funds in his savings account. Thus, when Franco issued checks drawn against his current
account, he had every right as creditor to expect that those checks would be honored by BPI-FB
as debtor.

More importantly, BPI-FB does not have a unilateral right to freeze the accounts of Franco based
on its mere suspicion that the funds therein were proceeds of the multi-million peso scam Franco
was allegedly involved in. To grant BPI-FB, or any bank for that matter, the right to take whatever
action it pleases on deposits which it supposes are derived from shady transactions, would open
the floodgates of public distrust in the banking industry.

Our pronouncement in Simex International (Manila), Inc. v. Court of Appeals 38 continues to

resonate, thus:

The banking system is an indispensable institution in the modern world and plays a vital role in the
economic life of every civilized nation. Whether as mere passive entities for the safekeeping and
saving of money or as active instruments of business and commerce, banks have become an
ubiquitous presence among the people, who have come to regard them with respect and even
gratitude and, most of all, confidence. Thus, even the humble wage-earner has not hesitated to
entrust his life’s savings to the bank of his choice, knowing that they will be safe in its custody and
will even earn some interest for him. The ordinary person, with equal faith, usually maintains a

5
modest checking account for security and convenience in the settling of his monthly bills and the
payment of ordinary expenses. x x x.

In every case, the depositor expects the bank to treat his account with the utmost fidelity, whether
such account consists only of a few hundred pesos or of millions. The bank must record every
single transaction accurately, down to the last centavo, and as promptly as possible. This has to
be done if the account is to reflect at any given time the amount of money the depositor can
dispose of as he sees fit, confident that the bank will deliver it as and to whomever directs. A
blunder on the part of the bank, such as the dishonor of the check without good reason, can
cause the depositor not a little embarrassment if not also financial loss and perhaps even civil and
criminal litigation.

The point is that as a business affected with public interest and because of the nature of its
functions, the bank is under obligation to treat the accounts of its depositors with meticulous care,
always having in mind the fiduciary nature of their relationship. x x x.

Ineluctably, BPI-FB, as the trustee in the fiduciary relationship, is duty bound to know the
signatures of its customers. Having failed to detect the forgery in the Authority to Debit and in the
process inadvertently facilitate the FMIC-Tevesteco transfer, BPI-FB cannot now shift liability
thereon to Franco and the other payees of checks issued by Tevesteco, or prevent withdrawals
from their respective accounts without the appropriate court writ or a favorable final judgment.

Further, it boggles the mind why BPI-FB, even without delving into the authenticity of the
signature in the Authority to Debit, effected the transfer of ₱80,000,000.00 from FMIC’s to
Tevesteco’s account, when FMIC’s account was a time deposit and it had already paid advance
interest to FMIC. Considering that there is as yet no indubitable evidence establishing Franco’s
participation in the forgery, he remains an innocent party. As between him and BPI-FB, the latter,
which made possible the present predicament, must bear the resulting loss or inconvenience.

Second. With respect to its liability for interest on Franco’s current account, BPI-FB argues that its
non-compliance with the Makati RTC’s Order Lifting the Order of Attachment and the legal
consequences thereof, is a matter that ought to be taken up in that court.

The argument is tenuous. We agree with the succinct holding of the appellate court in this respect.
The Manila RTC’s order to pay interests on Franco’s current account arose from BPI-FB’s
unjustified refusal to comply with its obligation to pay Franco pursuant to their contract of mutuum.
In other words, from the time BPI-FB refused Franco’s demand for the release of the deposits in
his current account, specifically, from May 17, 1990, interest at the rate of 12% began to accrue
thereon.39

Undeniably, the Makati RTC is vested with the authority to determine the legal consequences of
BPI-FB’s non-compliance with the Order Lifting the Order of Attachment. However, such authority
does not preclude the Manila RTC from ruling on BPI-FB’s liability to Franco for payment of
interest based on its continued and unjustified refusal to perform a contractual obligation upon
demand. After all, this was the core issue raised by Franco in his complaint before the Manila
RTC.

Third. As to the award to Franco of the deposits in Quiaoit’s account, we find no reason to depart
from the factual findings of both the Manila RTC and the CA.

6
Noteworthy is the fact that Quiaoit himself testified that the deposits in his account are actually
owned by Franco who simply accommodated Jaime Sebastian’s request to temporarily transfer
₱400,000.00 from Franco’s savings account to Quiaoit’s account. 40 His testimony cannot be
characterized as hearsay as the records reveal that he had personal knowledge of the
arrangement made between Franco, Sebastian and himself.41

BPI-FB makes capital of Franco’s belated allegation relative to this particular arrangement. It
insists that the transaction with Quiaoit was not specifically alleged in Franco’s complaint before
the Manila RTC. However, it appears that BPI-FB had impliedly consented to the trial of this issue
given its extensive cross-examination of Quiaoit.

Section 5, Rule 10 of the Rules of Court provides:

Section 5. Amendment to conform to or authorize presentation of evidence.— When issues not

raised by the pleadings are tried with the express or implied consent of the parties, they shall be
treated in all respects as if they had been raised in the pleadings. Such amendment of the
pleadings as may be necessary to cause them to conform to the evidence and to raise these
issues may be made upon motion of any party at any time, even after judgment; but failure to
amend does not affect the result of the trial of these issues. If evidence is objected to at the trial
on the ground that it is now within the issues made by the pleadings, the court may allow the
pleadings to be amended and shall do so with liberality if the presentation of the merits of the
action and the ends of substantial justice will be subserved thereby. The court may grant a
continuance to enable the amendment to be made. (Emphasis supplied)

In all, BPI-FB’s argument that this case is not the right forum for Franco to recover the
₱400,000.00 begs the issue. To reiterate, Quiaoit, testifying during the trial, unequivocally
disclaimed ownership of the funds in his account, and pointed to Franco as the actual owner
thereof. Clearly, Franco’s action for the recovery of his deposits appropriately covers the deposits
in Quiaoit’s account.

Fourth. Notwithstanding all the foregoing, BPI-FB continues to insist that the dishonor of Franco’s
checks respectively dated September 11 and 18, 1989 was legally in order in view of the Makati
RTC’s supplemental writ of attachment issued on September 14, 1989. It posits that as the party
that applied for the writ of attachment before the Makati RTC, it need not be served with the
Notice of Garnishment before it could place Franco’s accounts under garnishment.

The argument is specious. In this argument, we perceive BPI-FB’s clever but transparent ploy to
circumvent Section 4,42 Rule 13 of the Rules of Court. It should be noted that the strict
requirement on service of court papers upon the parties affected is designed to comply with the
elementary requisites of due process. Franco was entitled, as a matter of right, to notice, if the
requirements of due process are to be observed. Yet, he received a copy of the Notice of
Garnishment only on September 27, 1989, several days after the two checks he issued were
dishonored by BPI-FB on September 20 and 21, 1989. Verily, it was premature for BPI-FB to
freeze Franco’s accounts without even awaiting service of the Makati RTC’s Notice of
Garnishment on Franco.

Additionally, it should be remembered that the enforcement of a writ of attachment cannot be

made without including in the main suit the owner of the property attached by virtue thereof.
Section 5, Rule 13 of the Rules of Court specifically provides that "no levy or attachment pursuant
to the writ issued x x x shall be enforced unless it is preceded, or contemporaneously

7
accompanied, by service of summons, together with a copy of the complaint, the application for
attachment, on the defendant within the Philippines."

Franco was impleaded as party-defendant only on May 15, 1990. The Makati RTC had yet to
acquire jurisdiction over the person of Franco when BPI-FB garnished his accounts.43 Effectively,
therefore, the Makati RTC had no authority yet to bind the deposits of Franco through the writ of
attachment, and consequently, there was no legal basis for BPI-FB to dishonor the checks issued
by Franco.

Fifth. Anent the CA’s finding that BPI-FB was in bad faith and as such liable for the advance
interest it deducted from Franco’s time deposit account, and for moral as well as exemplary
damages, we find it proper to reinstate the ruling of the trial court, and allow only the recovery of
nominal damages in the amount of ₱10,000.00. However, we retain the CA’s award of
₱75,000.00 as attorney’s fees.

In granting Franco’s prayer for interest on his time deposit account and for moral and exemplary
damages, the CA attributed bad faith to BPI-FB because it (1) completely disregarded its
obligation to Franco; (2) misleadingly claimed that Franco’s deposits were under garnishment; (3)
misrepresented that Franco’s current account was not on file; and (4) refused to return the
₱400,000.00 despite the fact that the ostensible owner, Quiaoit, wanted the amount returned to
Franco.

In this regard, we are guided by Article 2201 of the Civil Code which provides:

Article 2201. In contracts and quasi-contracts, the damages for which the obligor who acted in
good faith is liable shall be those that are the natural and probable consequences of the breach of
the obligation, and which the parties have foreseen or could have reasonable foreseen at the time
the obligation was constituted.

In case of fraud, bad faith, malice or wanton attitude, the obligor shall be responsible for all
damages which may be reasonably attributed to the non-performance of the obligation.
(Emphasis supplied.)

We find, as the trial court did, that BPI-FB acted out of the impetus of self-protection and not out of
malevolence or ill will. BPI-FB was not in the corrupt state of mind contemplated in Article 2201
and should not be held liable for all damages now being imputed to it for its breach of obligation.
For the same reason, it is not liable for the unearned interest on the time deposit.

Bad faith does not simply connote bad judgment or negligence; it imports a dishonest purpose or
some moral obliquity and conscious doing of wrong; it partakes of the nature of fraud.44 We have
held that it is a breach of a known duty through some motive of interest or ill will. 45 In the instant
case, we cannot attribute to BPI-FB fraud or even a motive of self-enrichment. As the trial court
found, there was no denial whatsoever by BPI-FB of the existence of the accounts. The
computer-generated document which indicated that the current account was "not on file" resulted
from the prior debit by BPI-FB of the deposits. The remedy of freezing the account, or the
garnishment, or even the outright refusal to honor any transaction thereon was resorted to solely
for the purpose of holding on to the funds as a security for its intended court action, 46 and with no
other goal but to ensure the integrity of the accounts.

8
We have had occasion to hold that in the absence of fraud or bad faith, 47 moral damages cannot
be awarded; and that the adverse result of an action does not per se make the action wrongful, or
the party liable for it. One may err, but error alone is not a ground for granting such damages. 48

An award of moral damages contemplates the existence of the following requisites: (1) there must
be an injury clearly sustained by the claimant, whether physical, mental or psychological; (2) there
must be a culpable act or omission factually established; (3) the wrongful act or omission of the
defendant is the proximate cause of the injury sustained by the claimant; and (4) the award for
damages is predicated on any of the cases stated in Article 2219 of the Civil Code.49

Franco could not point to, or identify any particular circumstance in Article 2219 of the Civil
Code,50 upon which to base his claim for moral damages.1âwphi1

Thus, not having acted in bad faith, BPI-FB cannot be held liable for moral damages under Article
2220 of the Civil Code for breach of contract.51

We also deny the claim for exemplary damages. Franco should show that he is entitled to moral,
temperate, or compensatory damages before the court may even consider the question of
whether exemplary damages should be awarded to him. 52 As there is no basis for the award of
moral damages, neither can exemplary damages be granted.

While it is a sound policy not to set a premium on the right to litigate, 53 we, however, find that
Franco is entitled to reasonable attorney’s fees for having been compelled to go to court in order
to assert his right. Thus, we affirm the CA’s grant of ₱75,000.00 as attorney’s fees.

Attorney’s fees may be awarded when a party is compelled to litigate or incur expenses to protect
his interest,54 or when the court deems it just and equitable. 55 In the case at bench, BPI-FB
refused to unfreeze the deposits of Franco despite the Makati RTC’s Order Lifting the Order of
Attachment and Quiaoit’s unwavering assertion that the ₱400,000.00 was part of Franco’s
savings account. This refusal constrained Franco to incur expenses and litigate for almost two (2)
decades in order to protect his interests and recover his deposits. Therefore, this Court deems it
just and equitable to grant Franco ₱75,000.00 as attorney’s fees. The award is reasonable in view
of the complexity of the issues and the time it has taken for this case to be resolved. 56

Sixth. As for the dismissal of BPI-FB’s counter-claim, we uphold the Manila RTC’s ruling, as
affirmed by the CA, that BPI-FB is not entitled to recover ₱3,800,000.00 as actual damages.
BPI-FB’s alleged loss of profit as a result of Franco’s suit is, as already pointed out, of its own
making. Accordingly, the denial of its counter-claim is in order.

WHEREFORE, the petition is PARTIALLY GRANTED. The Court of Appeals Decision dated
November 29, 1995 is AFFIRMED with the MODIFICATION that the award of unearned interest
on the time deposit and of moral and exemplary damages is DELETED.

No pronouncement as to costs.

SO ORDERED.

9
G.R. No. L-20240 December 31, 1965

REPUBLIC OF THE PHILIPPINES, plaintiff-appellee,

vs.
JOSE GRIJALDO, defendant-appellant.

Office of the Solicitor General for plaintiff-appellee.

Isabelo P. Samson for defendant-appellant.

10
ZALDIVAR, J.:

In the year 1943 appellant Jose Grijaldo obtained five loans from the branch office of the Bank of
Taiwan, Ltd. in Bacolod City, in the total sum of P1,281.97 with interest at the rate of 6% per
annum, compounded quarterly. These loans are evidenced by five promissory notes executed by
the appellant in favor of the Bank of Taiwan, Ltd., as follows: On June 1, 1943, P600.00; on June
3, 1943, P159.11; on June 18, 1943, P22.86; on August 9, 1943,P300.00; on August 13, 1943,
P200.00, all notes without due dates, but because the loans were due one year after they were
incurred. To secure the payment of the loans the appellant executed a chattel mortgage on the
standing crops on his land, Lot No. 1494 known as Hacienda Campugas in Hinigiran, Negros
Occidental.

By virtue of Vesting Order No. P-4, dated January 21, 1946, and under the authority provided for
in the Trading with the Enemy Act, as amended, the assets in the Philippines of the Bank of
Taiwan, Ltd. were vested in the Government of the United States. Pursuant to the Philippine
Property Act of 1946 of the United States, these assets, including the loans in question, were
subsequently transferred to the Republic of the Philippines by the Government of the United
States under Transfer Agreement dated July 20, 1954. These assets were among the properties
that were placed under the administration of the Board of Liquidators created under Executive
Order No. 372, dated November 24, 1950, and in accordance with Republic Acts Nos. 8 and 477
and other pertinent laws.

On September 29, 1954 the appellee, Republic of the Philippines, represented by the Chairman
of the Board of Liquidators, made a written extrajudicial demand upon the appellant for the
payment of the account in question. The record shows that the appellant had actually received the
written demand for payment, but he failed to pay.

The aggregate amount due as principal of the five loans in question, computed under the
Ballantyne scale of values as of the time that the loans were incurred in 1943, was P889.64; and
the interest due thereon at the rate of 6% per annum compounded quarterly, computed as of
December 31, 1959 was P2,377.23.

On January 17, 1961 the appellee filed a complaint in the Justice of the Peace Court of Hinigaran,
Negros Occidental, to collect from the appellant the unpaid account in question. The Justice of the
Peace Of Hinigaran, after hearing, dismissed the case on the ground that the action had
prescribed. The appellee appealed to the Court of First Instance of Negros Occidental and on
March 26, 1962 the court a quo rendered a decision ordering the appellant to pay the appellee the
sum of P2,377.23 as of December 31, 1959, plus interest at the rate of 6% per annum
compounded quarterly from the date of the filing of the complaint until full payment was made.
The appellant was also ordered to pay the sum equivalent to 10% of the amount due as attorney's
fees and costs.

The appellant appealed directly to this Court. During the pendency of this appeal the appellant
Jose Grijaldo died. Upon motion by the Solicitor General this Court, in a resolution of May 13,
1963, required Manuel Lagtapon, Jacinto Lagtapon, Ruben Lagtapon and Anita L. Aguilar, who
are the legal heirs of Jose Grijaldo to appear and be substituted as appellants in accordance with
Section 17 of Rule 3 of the Rules of Court.

In the present appeal the appellant contends: (1) that the appellee has no cause of action against
the appellant; (2) that if the appellee has a cause of action at all, that action had prescribed; and
(3) that the lower court erred in ordering the appellant to pay the amount of P2,377.23.

11
In discussing the first point of contention, the appellant maintains that the appellee has no privity
of contract with the appellant. It is claimed that the transaction between the Taiwan Bank, Ltd. and
the appellant, so that the appellee, Republic of the Philippines, could not legally bring action
against the appellant for the enforcement of the obligation involved in said transaction. This
contention has no merit. It is true that the Bank of Taiwan, Ltd. was the original creditor and the
transaction between the appellant and the Bank of Taiwan was a private contract of loan.
However, pursuant to the Trading with the Enemy Act, as amended, and Executive Order No.
9095 of the United States; and under Vesting Order No. P-4, dated January 21, 1946, the
properties of the Bank of Taiwan, Ltd., an entity which was declared to be under the jurisdiction of
the enemy country (Japan), were vested in the United States Government and the Republic of the
Philippines, the assets of the Bank of Taiwan, Ltd. were transferred to and vested in the Republic
of the Philippines. The successive transfer of the rights over the loans in question from the Bank
of Taiwan, Ltd. to the United States Government, and from the United States Government to the
government of the Republic of the Philippines, made the Republic of the Philippines the
successor of the rights, title and interest in said loans, thereby creating a privity of contract
between the appellee and the appellant. In defining the word "privy" this Court, in a case, said:

The word "privy" denotes the idea of succession ... hence an assignee of a credit, and one
subrogated to it, etc. will be privies; in short, he who by succession is placed in the position of one
of those who contracted the judicial relation and executed the private document and appears to
be substituting him in the personal rights and obligation is a privy (Alpurto vs. Perez, 38 Phil. 785,
790).

The United States of America acting as a belligerent sovereign power seized the assets of the
Bank of Taiwan, Ltd. which belonged to an enemy country. The confiscation of the assets of the
Bank of Taiwan, Ltd. being an involuntary act of war, and sanctioned by international law, the
United States succeeded to the rights and interests of said Bank of Taiwan, Ltd. over the assets of
said bank. As successor in interest in, and transferee of, the property rights of the United States of
America over the loans in question, the Republic of the Philippines had thereby become a privy to
the original contracts of loan between the Bank of Taiwan, Ltd. and the appellant. It follows,
therefore, that the Republic of the Philippines has a legal right to bring the present action against
the appellant Jose Grijaldo.

The appellant likewise maintains, in support of his contention that the appellee has no cause of
action, that because the loans were secured by a chattel mortgage on the standing crops on a
land owned by him and these crops were lost or destroyed through enemy action his obligation to
pay the loans was thereby extinguished. This argument is untenable. The terms of the promissory
notes and the chattel mortgage that the appellant executed in favor of the Bank of Taiwan, Ltd. do
not support the claim of appellant. The obligation of the appellant under the five promissory notes
was not to deliver a determinate thing namely, the crops to be harvested from his land, or the
value of the crops that would be harvested from his land. Rather, his obligation was to pay a
generic thing — the amount of money representing the total sum of the five loans, with interest.
The transaction between the appellant and the Bank of Taiwan, Ltd. was a series of five contracts
of simple loan of sums of money. "By a contract of (simple) loan, one of the parties delivers to
another ... money or other consumable thing upon the condition that the same amount of the
same kind and quality shall be paid." (Article 1933, Civil Code) The obligation of the appellant
under the five promissory notes evidencing the loans in questions is to pay the value thereof; that
is, to deliver a sum of money — a clear case of an obligation to deliver, a generic thing. Article
1263 of the Civil Code provides:

12
In an obligation to deliver a generic thing, the loss or destruction of anything of the same kind
does not extinguish the obligation.

The chattel mortgage on the crops growing on appellant's land simply stood as a security for the
fulfillment of appellant's obligation covered by the five promissory notes, and the loss of the crops
did not extinguish his obligation to pay, because the account could still be paid from other sources
aside from the mortgaged crops.

In his second point of contention, the appellant maintains that the action of the appellee had
prescribed. The appellant points out that the loans became due on June 1, 1944; and when the
complaint was filed on January 17,1961 a period of more than 16 years had already elapsed —
far beyond the period of ten years when an action based on a written contract should be brought
to court.

This contention of the appellant has no merit. Firstly, it should be considered that the complaint in
the present case was brought by the Republic of the Philippines not as a nominal party but in the
exercise of its sovereign functions, to protect the interests of the State over a public property.
Under paragraph 4 of Article 1108 of the Civil Code prescription, both acquisitive and extinctive,
does not run against the State. This Court has held that the statute of limitations does not run
against the right of action of the Government of the Philippines (Government of the Philippine
Islands vs. Monte de Piedad, etc., 35 Phil. 738-751).Secondly, the running of the period of
prescription of the action to collect the loan from the appellant was interrupted by the moratorium
laws (Executive Orders No. 25, dated November 18, 1944; Executive Order No. 32. dated March
10, 1945; and Republic Act No. 342, approved on July 26, 1948). The loan in question, as
evidenced by the five promissory notes, were incurred in the year 1943, or during the period of
Japanese occupation of the Philippines. This case is squarely covered by Executive Order No. 25,
which became effective on November 18, 1944, providing for the suspension of payments of
debts incurred after December 31, 1941. The period of prescription was, therefore, suspended
beginning November 18, 1944. This Court, in the case of Rutter vs. Esteban (L-3708, May 18,
1953, 93 Phil. 68), declared on May 18, 1953 that the Moratorium Laws, R.A. No. 342 and
Executive Orders Nos. 25 and 32, are unconstitutional; but in that case this Court ruled that the
moratorium laws had suspended the prescriptive period until May 18, 1953. This ruling was
categorically reiterated in the decision in the case of Manila Motors vs. Flores, L-9396, August 16,
1956. It follows, therefore, that the prescriptive period in the case now before US was suspended
from November 18,1944, when Executive Orders Nos. 25 and 32 were declared unconstitutional
by this Court. Computed accordingly, the prescriptive period was suspended for 8 years and 6
months. By the appellant's own admission, the cause of action on the five promissory notes in
question arose on June 1, 1944. The complaint in the present case was filed on January 17, 1961,
or after a period of 16 years, 6 months and 16 days when the cause of action arose. If the
prescriptive period was not interrupted by the moratorium laws, the action would have prescribed
already; but, as We have stated, the prescriptive period was suspended by the moratorium laws
for a period of 8 years and 6 months. If we deduct the period of suspension (8 years and 6 months)
from the period that elapsed from the time the cause of action arose to the time when the
complaint was filed (16 years, 6 months and 16 days) there remains a period of 8 years and 16
days. In other words, the prescriptive period ran for only 8 years and 16 days. There still remained
a period of one year, 11 months and 14 days of the prescriptive period when the complaint was
filed.

In his third point of contention the appellant maintains that the lower court erred in ordering him to
pay the amount of P2,377.23. It is claimed by the appellant that it was error on the part of the
lower court to apply the Ballantyne Scale of values in evaluating the Japanese war notes as of

13
June 1943 when the loans were incurred, because what should be done is to evaluate the loans
on the basis of the Ballantyne Scale as of the time the loans became due, and that was in June
1944. This contention of the appellant is also without merit.

The decision of the court a quo ordered the appellant to pay the sum of P2,377.23 as of
December 31, 1959, plus interest rate of 6% per annum compounded quarterly from the date of
the filing of the complaint. The sum total of the five loans obtained by the appellant from the Bank
of Taiwan, Ltd. was P1,281.97 in Japanese war notes. Computed under the Ballantyne Scale of
values as of June 1943, this sum of P1,281.97 in Japanese war notes in June 1943 is equivalent
to P889.64 in genuine Philippine currency which was considered the aggregate amount due as
principal of the five loans, and the amount of P2,377.23 as of December 31, 1959 was arrived at
after computing the interest on the principal sum of P889.64 compounded quarterly from the time
the obligations were incurred in 1943.

It is the stand of the appellee that the Ballantyne scale of values should be applied as of the time
the obligation was incurred, and that was in June 1943. This stand of the appellee was upheld by
the lower court; and the decision of the lower court is supported by the ruling of this Court in the
case of Hilado vs. De la Costa (G.R. No. L-150, April 30, 1949; 46 O.G. 5472), which states:

... Contracts stipulating for payments presumably in Japanese war notes may be enforced in our
Courts after the liberation to the extent of the just obligation of the contracting parties and, as said
notes have become worthless, in order that justice may be done and the party entitled to be paid
can recover their actual value in Philippine Currency, what the debtor or defendant bank should
return or pay is the value of the Japanese military notes in relation to the peso in Philippine
Currency obtaining on the date when and at the place where the obligation was incurred unless
the parties had agreed otherwise. ... . (italics supplied)

IN VIEW OF THE FOREGOING, the decision appealed from is affirmed, with costs against the
appellant. Inasmuch as the appellant Jose Grijaldo died during the pendency of this appeal, his
estate must answer in the execution of the judgment in the present case.

14
G.R. No. 183360 September 8, 2014

ROLANDO C. DE LA PAZ,* Petitioner,

vs.
L & J DEVELOPMENT COMPANY, Respondent.

DECISION

DEL CASTILLO, J.:

"No interest shall be due unless it has been expressly stipulated in writing." 1

This is a Petition for Review on Certiorari 2 assailing the February 27, 2008 Decision3 of the Court
of Appeals (CA) in CA-G.R. SP No. 100094, which reversed and set aside the Decision 4 dated
April 19, 2007 of the Regional Trial Court (RTC), Branch 192, Marikina City in Civil Case No.
06-1145-MK. The said RTC Decision affirmed in all respects the Decision5 dated June 30, 2006 of
the Metropolitan Trial Court (MeTC), Branch 75, Marikina City in Civil Case No. 05-7755, which
ordered respondent L & J Development Company (L&J) to pay petitioner Architect Rolando C. De
La Paz (Rolando) its principal obligation of ₱350,000.00, plus 12% interest per annumreckoned
from the filing of the Complaint until full payment of the obligation.

Likewise assailed is the CA’s June 6, 2008 Resolution6 which denied Rolando’s Motion for
Reconsideration.

Factual Antecedents

On December 27, 2000, Rolando lent ₱350,000.00 without any security to L&J, a property
developer with Atty. Esteban Salonga (Atty. Salonga) as its President and General Manager. The
loan, with no specified maturity date, carried a 6% monthly interest, i.e., ₱21,000.00. From
December 2000 to August 2003, L&J paid Rolando a total of ₱576,000.00 7 representing interest
charges.

15
As L&J failed to pay despite repeated demands, Rolando filed a Complaint 8 for Collection of Sum
of Money with Damages against L&J and Atty. Salonga in his personal capacity before the MeTC,
docketed as Civil Case No. 05-7755. Rolando alleged, amongothers, that L&J’s debtas of January
2005, inclusive of the monthly interest, stood at ₱772,000.00; that the 6% monthly interest was
upon Atty. Salonga’s suggestion; and, that the latter tricked him into parting with his money
without the loan transaction being reduced into writing.

In their Answer,9 L&J and Atty. Salonga denied Rolando’s allegations. While they acknowledged
the loan as a corporate debt, they claimed that the failure to pay the same was due to a fortuitous
event, that is, the financial difficulties brought about by the economic crisis. They further argued
that Rolando cannot enforce the 6% monthly interest for being unconscionable and shocking to
the morals. Hence, the payments already made should be applied to the ₱350,000.00 principal
loan.

During trial, Rolando testified that he had no communication with Atty. Salonga prior to the loan
transaction but knew him as a lawyer, a son of a former Senator, and the owner of L&J which
developed Brentwood Subdivision in Antipolo where his associate Nilo Velasco (Nilo) lives. When
Nilo told him that Atty. Salonga and L&J needed money to finish their projects, heagreed to lend
them money. He personally met withAtty. Salonga and their meeting was cordial.

He narrated that when L&J was in the process of borrowing the ₱350,000.00 from him, it was
Arlene San Juan (Arlene), the secretary/treasurer of L&J, who negotiated the terms and
conditions thereof.She said that the money was to finance L&J’s housing project. Rolando
claimed that it was not he who demanded for the 6% monthly interest. It was L&J and Atty.
Salonga, through Arlene, who insisted on paying the said interest as they asserted that the loan
was only a short-term one.

Ruling of the Metropolitan Trial Court

The MeTC, in its Decision10 of June 30, 2006, upheld the 6% monthly interest. In so ruling, it
ratiocinated that since L&J agreed thereto and voluntarily paid the interest at suchrate from 2000
to 2003, it isalready estopped from impugning the same. Nonetheless, for reasons of equity, the
saidcourt reduced the interest rate to 12% per annumon the remaining principal obligation of
₱350,000.00. With regard to Rolando’s prayer for moral damages, the MeTC denied the same as
it found no malice or bad faith on the part ofL&J in not paying the obligation. It likewise relieved
Atty. Salonga of any liability as it found that he merely acted in his official capacity in obtaining the
loan. The MeTC disposed of the case as follows:

WHEREFORE, premises considered, judgment is hereby rendered in favor of the plaintiff, Arch.
Rolando C. Dela Paz, and against the defendant, L & J Development Co., Inc., as follows:

a) ordering the defendant L & J Development Co., Inc. to pay plaintiff the amount of Three
Hundred Fifty Thousand Pesos (₱350,000.00) representing the principal obligation, plus interest
at the legal rate of 12% per annum to be computed from January 20, 2005, the date of the filing of
the complaint, until the whole obligation is fully paid;

b) ordering the defendant L & J Development Co., Inc. to pay plaintiff the amount of Five
Thousand Pesos (₱5,000.00) as and for attorney’s fees; and

c) to pay the costs of this suit.

16
SO ORDERED.11

Ruling of the Regional Trial Court

L&J appealed to the RTC. It asserted in its appeal memorandum 12 that from December 2000 to
March 2003, it paid monthly interest of ₱21,000.00 based on the agreed-upon interest rate of
6%monthly and from April 2003 to August 2003, interest paymentsin various amounts. 13 The total
of interest payments made amounts to ₱576,000.00 – an amount which is even more than the
principal obligation of ₱350,000.00

L&J insisted that the 6% monthly interest rate is unconscionable and immoral. Hence, the 12%
per annumlegal interest should have been applied from the time of the constitution of the
obligation. At 12% per annum interest rate, it asserted that the amount of interestit ought to pay
from December 2000 to March 2003 and from April 2003 to August 2003, only amounts to
₱105,000.00. If this amount is deducted from the total interest paymentsalready made, which is
₱576,000.00, the amount of ₱471,000.00 appears to have beenpaid over and above what is due.
Applying the rule on compensation, the principal loan of ₱350,000.00 should be set-off against
the ₱471,000.00, resulting in the complete payment of the principal loan.

Unconvinced, the RTC, inits April 19, 2007 Decision,14 affirmed the MeTC Decision, viz:
WHEREFORE, premises considered, the Decision appealed from is hereby AFFIRMED in all
respects, with costs against the appellant.

SO ORDERED.15

Ruling of the Court of Appeals

Undaunted, L&J went to the CA and echoed its arguments and proposed computation as
proffered before the RTC.

In a Decision16 dated February 27, 2008, the CAreversed and set aside the RTC Decision. The
CA stressed that the parties failedto stipulate in writing the imposition of interest on the loan.
Hence, no interest shall be due thereon pursuant to Article 1956 of the Civil Code. 17 And even if
payment of interest has been stipulated in writing, the 6% monthly interest is still outrightly illegal
and unconscionable because it is contrary to morals, if not against the law. Being void, this cannot
be ratified and may be set up by the debtor as defense. For these reasons, Rolando cannot
collect any interest even if L&J offered to pay interest. Consequently, he has to return all the
interest payments of ₱576,000.00 to L&J.

Considering further that Rolando and L&J thereby became creditor and debtor of each other, the
CA applied the principle of legal compensation under Article 1279 of the Civil Code.18 Accordingly,
it set off the principal loan of ₱350,000.00 against the ₱576,000.00 total interest payments made,
leaving an excess of ₱226,000.00, which the CA ordered Rolando to pay L&J plus interest. Thus:

WHEREFORE, the DECISION DATED APRIL 19, 2007 is REVERSED and SET ASIDE.

CONSEQUENT TO THE FOREGOING, respondent Rolando C. Dela Paz is ordered to pay to the
petitioner the amount of ₱226,000.00,plus interest of 12% per annumfrom the finality of this
decision.

17
Costs of suit to be paid by respondent Dela Paz.

SO ORDERED.19

In his Motion for Reconsideration,20 Rolando argued thatthe circumstances exempt both the
application of Article 1956 and of jurisprudence holding that a 6% monthly interest is
unconscionable, unreasonable, and exorbitant. He alleged that Atty. Salonga, a lawyer, should
have taken it upon himself to have the loan and the stipulated rate of interest documented but, by
way of legal maneuver, Atty. Salonga, whom he fully trusted and relied upon, tricked him into
believing that the undocumented and uncollateralized loan was withinlegal bounds. Had Atty.
Salonga told him that the stipulated interest should be in writing, he would have readily assented.
Furthermore, Rolando insisted that the 6% monthly interest ratecould not be unconscionable as in
the first place, the interest was not imposed by the creditor but was in fact offered by the borrower,
who also dictated all the terms of the loan. He stressed that in cases where interest rates were
declared unconscionable, those meant to be protected by such declaration are helpless
borrowers which is not the case here.

Still, the CA denied Rolando’s motion in its Resolution21 of June 6, 2008.

Hence, this Petition.

The Parties’ Arguments

Rolando argues that the 6%monthly interest rateshould not have been invalidated because Atty.
Salonga took advantage of his legal knowledge to hoodwink him into believing that no document
was necessaryto reflect the interest rate. Moreover, the cases anent unconscionable interest
rates that the CA relied upon involve lenders who imposed the excessive rates,which are totally
different from the case at bench where it is the borrower who decided on the high interest rate.
This case does not fall under a scenariothat ‘enslaves the borrower or that leads to the
hemorrhaging of his assets’ that the courts seek to prevent.

L&J, in controverting Rolando’s arguments, contends that the interest rate is subject of
negotiation and is agreedupon by both parties, not by the borrower alone. Furthermore,
jurisprudence has nullified interestrates on loans of 3% per month and higher as these rates are
contrary to moralsand public interest. And while Rolando raises bad faithon Atty. Salonga’s part,
L&J avers thatsuch issue is a question of fact, a matter that cannot be raised under Rule 45.

Issue

The Court’s determination of whether to uphold the judgment of the CA that the principal loan is
deemed paid isdependent on the validity of the monthly interest rate imposed. And in determining
such validity, the Court must necessarily delve into matters regarding a) the form of the
agreement of interest under the law and b) the alleged unconscionability of the interest rate. Our
Ruling

The Petition is devoid of merit.

The lack of a written stipulation to pay interest on the loaned amount disallows a creditor from
charging monetary interest.

18
Under Article 1956 of the Civil Code, no interest shall bedue unless it has been expressly
stipulated in writing. Jurisprudence on the matter also holds that for interest to be due and
payable, two conditions must concur: a) express stipulation for the payment of interest; and b) the
agreement to pay interest is reduced in writing.

Here, it is undisputed that the parties did not put down in writing their agreement. Thus, no interest
is due. The collection of interest without any stipulation in writing is prohibited by law. 22

But Rolando asserts that his situation deserves an exception to the application of Article 1956. He
blames Atty. Salonga for the lack of a written document, claiming that said lawyer used his legal
knowledge to dupe him. Rolando thus imputes bad faith on the part of L&J and Atty. Salonga. The
Court, however, finds no deception on the partof L&J and Atty. Salonga. For one, despite the lack
of a document stipulating the payment of interest, L&J nevertheless devotedly paid interests on
the loan. It only stopped when it suffered from financial difficulties that prevented it from
continuously paying the 6% monthly rate. For another,regardless of Atty. Salonga’s profession,
Rolando who is an architect and an educated man himself could have been a more reasonably
prudent person under the circumstances. To top it all, he admitted that he had no prior
communication with Atty. Salonga. Despite Atty. Salonga being a complete stranger, he
immediately trusted him and lent his company ₱350,000.00, a significant amount. Moreover, as
the creditor,he could have requested or required that all the terms and conditions of the loan
agreement, which include the payment of interest, be put down in writing to ensure that he and
L&J are on the same page. Rolando had a choice of not acceding and to insist that their contract
be put in written form as this will favor and safeguard him as a lender. Unfortunately, he did not. It
must be stressed that "[c]ourts cannot follow one every step of his life and extricate him from bad
bargains, protect him from unwise investments, relieve him from one-sided contracts,or annul the
effects of foolish acts. Courts cannotconstitute themselves guardians of persons who are not
legally incompetent."23

It may be raised that L&J is estopped from questioning the interest rate considering that it has
been paying Rolando interest at such ratefor more than two and a half years. In fact, in its
pleadings before the MeTCand the RTC, L&J merely prayed for the reduction of interest from 6%
monthly to 1% monthly or 12% per annum. However, in Ching v. Nicdao, 24 the daily payments of
the debtor to the lender were considered as payment of the principal amount of the loan because
Article 1956 was not complied with. This was notwithstanding the debtor’s admission that the
payments made were for the interests due. The Court categorically stated therein that "[e]stoppel
cannot give validity to an act that is prohibited by law or one thatis against public policy."

Even if the payment of interest has been reduced in writing, a 6% monthly interest rate on a loan
is unconscionable, regardless of who between the parties proposed the rate.

Indeed at present, usury has been legally non-existent in view of the suspension of the Usury
Law25 by Central Bank Circular No. 905 s. 1982.26 Even so, not all interest rates levied upon loans
are permitted by the courts as they have the power to equitably reduce unreasonable interest
rates. In Trade & Investment Development Corporation of the Philippines v. Roblett Industrial
Construction Corporation,27 we said:

While the Court recognizes the right of the parties to enter into contracts and who are expectedto
comply with their terms and obligations, this rule is not absolute. Stipulated interest rates are
illegal if they are unconscionable and the Court is allowed to temper interest rates when
necessary. In exercising this vested power to determine what is iniquitous and unconscionable,

19
the Court must consider the circumstances of each case. What may be iniquitous and
unconscionable in onecase, may be just in another. x x x 28

Time and again, it has been ruled in a plethora of cases that stipulated interest rates of 3% per
month and higher, are excessive, iniquitous, unconscionable and exorbitant. Such stipulations are
void for being contrary to morals, if not against the law. 29 The Court, however, stresses that these
rates shall be invalidated and shall be reduced only in cases where the terms of the loans are
open-ended, and where the interest rates are applied for an indefinite period. Hence, the
imposition of a specific sum of ₱40,000.00 a month for six months on a ₱1,000,000.00 loan is not
considered unconscionable.30

In the case at bench, there is no specified period as to the payment of the loan. Hence, levying
6% monthly or 72% interest per annumis "definitely outrageous and inordinate." 31 The situation
that it was the debtor who insisted on the interest rate will not exempt Rolando from a ruling that
the rate is void. As this Court cited in Asian Cathay Finance and Leasing Corporation v.
Gravador,32 "[t]he imposition of an unconscionable rate of interest on a money debt, even if
knowingly and voluntarily assumed, is immoral and unjust. It is tantamount to a repugnant
spoliation and an iniquitous deprivation of property, repulsive to the common sense of
man."33 Indeed, "voluntariness does notmake the stipulation on [an unconscionable] interest
valid."34

As exhaustibly discussed,no monetary interest isdue Rolando pursuant to Article

1956.1âwphi1 The CA thus correctly adjudged that the excess interest payments made by L&J
should be applied to its principal loan. As computed by the CA, Rolando is bound to return the
excess payment of ₱226,000.00 to L&J following the principle of solutio indebiti. 35

However, pursuant to Central Bank Circular No. 799 s. 2013 which took effect on July 1,
2013,36 the interest imposed by the CA must be accordingly modified. The ₱226,000.00 which
Rolando is ordered to pay L&J shall earn an interest of 6% per annumfrom the finality of this
Decision.

WHEREFORE, the Decision dated February 27, 2008 of the Court of Appeals in CA-G.R. SP No.
100094 is hereby AFFIRMED with modification that petitioner Rolando C. De La Paz is ordered to
pay respondent L&J Development Company the amount of ,₱226,000.00, plus interest of 6o/o per
annum from the finality of this Decision until fully paid.

SO ORDERED.

20
21
G.R. No. 138677 February 12, 2002

TOLOMEO LIGUTAN and LEONIDAS DE LA LLANA, petitioners,

vs.
HON. COURT OF APPEALS & SECURITY BANK & TRUST COMPANY, respondents.

DECISION

VITUG, J.:

Before the Court is a petition for review on certiorari under Rule 45 of the Rules of Court, assailing
the decision and resolutions of the Court of Appeals in CA-G.R. CV No. 34594, entitled "Security
Bank and Trust Co. vs. Tolomeo Ligutan, et al."

Petitioners Tolomeo Ligutan and Leonidas dela Llana obtained on 11 May 1981 a loan in the
amount of P120,000.00 from respondent Security Bank and Trust Company. Petitioners executed
a promissory note binding themselves, jointly and severally, to pay the sum borrowed with an
interest of 15.189% per annum upon maturity and to pay a penalty of 5% every month on the
outstanding principal and interest in case of default. In addition, petitioners agreed to pay 10% of
the total amount due by way of attorney’s fees if the matter were indorsed to a lawyer for
collection or if a suit were instituted to enforce payment. The obligation matured on 8 September
1981; the bank, however, granted an extension but only up until 29 December 1981.

Despite several demands from the bank, petitioners failed to settle the debt which, as of 20 May
1982, amounted to P114,416.10. On 30 September 1982, the bank sent a final demand letter to
petitioners informing them that they had five days within which to make full payment. Since
petitioners still defaulted on their obligation, the bank filed on 3 November 1982, with the Regional
Trial Court of Makati, Branch 143, a complaint for recovery of the due amount.

After petitioners had filed a joint answer to the complaint, the bank presented its evidence and, on
27 March 1985, rested its case. Petitioners, instead of introducing their own evidence, had the
hearing of the case reset on two consecutive occasions. In view of the absence of petitioners and
their counsel on 28 August 1985, the third hearing date, the bank moved, and the trial court
resolved, to consider the case submitted for decision.

22
Two years later, or on 23 October 1987, petitioners filed a motion for reconsideration of the order
of the trial court declaring them as having waived their right to present evidence and prayed that
they be allowed to prove their case. The court a quo denied the motion in an order, dated 5
September 1988, and on 20 October 1989, it rendered its decision, 1 the dispositive portion of
which read:

"WHEREFORE, judgment is hereby rendered in favor of the plaintiff and against the defendants,
ordering the latter to pay, jointly and severally, to the plaintiff, as follows:

"1. The sum of P114,416.00 with interest thereon at the rate of 15.189% per annum, 2% service
charge and 5% per month penalty charge, commencing on 20 May 1982 until fully paid;

"2. To pay the further sum equivalent to 10% of the total amount of indebtedness for and as
attorney’s fees; and

"3. To pay the costs of the suit."2

Petitioners interposed an appeal with the Court of Appeals, questioning the rejection by the trial
court of their motion to present evidence and assailing the imposition of the 2% service charge,
the 5% per month penalty charge and 10% attorney's fees. In its decision 3 of 7 March 1996, the
appellate court affirmed the judgment of the trial court except on the matter of the 2% service
charge which was deleted pursuant to Central Bank Circular No. 783. Not fully satisfied with the
decision of the appellate court, both parties filed their respective motions for reconsideration. 4
Petitioners prayed for the reduction of the 5% stipulated penalty for being unconscionable. The
bank, on the other hand, asked that the payment of interest and penalty be commenced not from
the date of filing of complaint but from the time of default as so stipulated in the contract of the
parties.

On 28 October 1998, the Court of Appeals resolved the two motions thusly:

"We find merit in plaintiff-appellee’s claim that the principal sum of P114,416.00 with interest
thereon must commence not on the date of filing of the complaint as we have previously held in
our decision but on the date when the obligation became due.

"Default generally begins from the moment the creditor demands the performance of the
obligation. However, demand is not necessary to render the obligor in default when the obligation
or the law so provides.

"In the case at bar, defendants-appellants executed a promissory note where they undertook to
pay the obligation on its maturity date 'without necessity of demand.' They also agreed to pay the
interest in case of non-payment from the date of default.

"x x x xxx xxx

"While we maintain that defendants-appellants must be bound by the contract which they
acknowledged and signed, we take cognizance of their plea for the application of the provisions of
Article 1229 x x x.

"Considering that defendants-appellants partially complied with their obligation under the
promissory note by the reduction of the original amount of P120,000.00 to P114,416.00 and in

23
order that they will finally settle their obligation, it is our view and we so hold that in the interest of
justice and public policy, a penalty of 3% per month or 36% per annum would suffice.

"x x x xxx xxx

"WHEREFORE, the decision sought to be reconsidered is hereby MODIFIED. The

defendants-appellants Tolomeo Ligutan and Leonidas dela Llana are hereby ordered to pay the
plaintiff-appellee Security Bank and Trust Company the following:

"1. The sum of P114,416.00 with interest thereon at the rate of 15.189% per annum and 3% per
month penalty charge commencing May 20, 1982 until fully paid;

"2. The sum equivalent to 10% of the total amount of the indebtedness as and for attorney’s
fees."5

On 16 November 1998, petitioners filed an omnibus motion for reconsideration and to admit newly
discovered evidence,6 alleging that while the case was pending before the trial court, petitioner
Tolomeo Ligutan and his wife Bienvenida Ligutan executed a real estate mortgage on 18 January
1984 to secure the existing indebtedness of petitioners Ligutan and dela Llana with the bank.
Petitioners contended that the execution of the real estate mortgage had the effect of novating the
contract between them and the bank. Petitioners further averred that the mortgage was
extrajudicially foreclosed on 26 August 1986, that they were not informed about it, and the bank
did not credit them with the proceeds of the sale. The appellate court denied the omnibus motion
for reconsideration and to admit newly discovered evidence, ratiocinating that such a second
motion for reconsideration cannot be entertained under Section 2, Rule 52, of the 1997 Rules of
Civil Procedure. Furthermore, the appellate court said, the newly-discovered evidence being
invoked by petitioners had actually been known to them when the case was brought on appeal
and when the first motion for reconsideration was filed.7

Aggrieved by the decision and resolutions of the Court of Appeals, petitioners elevated their case
to this Court on 9 July 1999 via a petition for review on certiorari under Rule 45 of the Rules of
Court, submitting thusly -

"I. The respondent Court of Appeals seriously erred in not holding that the 15.189% interest and
the penalty of three (3%) percent per month or thirty-six (36%) percent per annum imposed by
private respondent bank on petitioners’ loan obligation are still manifestly exorbitant, iniquitous
and unconscionable.

"II. The respondent Court of Appeals gravely erred in not reducing to a reasonable level the ten
(10%) percent award of attorney’s fees which is highly and grossly excessive, unreasonable and
unconscionable.

"III. The respondent Court of Appeals gravely erred in not admitting petitioners’ newly discovered
evidence which could not have been timely produced during the trial of this case.

"IV. The respondent Court of Appeals seriously erred in not holding that there was a novation of
the cause of action of private respondent’s complaint in the instant case due to the subsequent
execution of the real estate mortgage during the pendency of this case and the subsequent
foreclosure of the mortgage."8

24
Respondent bank, which did not take an appeal, would, however, have it that the penalty sought
to be deleted by petitioners was even insufficient to fully cover and compensate for the cost of
money brought about by the radical devaluation and decrease in the purchasing power of the
peso, particularly vis-a-vis the U.S. dollar, taking into account the time frame of its occurrence.
The Bank would stress that only the amount of P5,584.00 had been remitted out of the entire loan
of P120,000.00.9

A penalty clause, expressly recognized by law, 10 is an accessory undertaking to assume greater

liability on the part of an obligor in case of breach of an obligation. It functions to strengthen the
coercive force of the obligation11 and to provide, in effect, for what could be the liquidated
damages resulting from such a breach. The obligor would then be bound to pay the stipulated
indemnity without the necessity of proof on the existence and on the measure of damages caused
by the breach.12 Although a court may not at liberty ignore the freedom of the parties to agree on
such terms and conditions as they see fit that contravene neither law nor morals, good customs,
public order or public policy, a stipulated penalty, nevertheless, may be equitably reduced by the
courts if it is iniquitous or unconscionable or if the principal obligation has been partly or irregularly
complied with.13

The question of whether a penalty is reasonable or iniquitous can be partly subjective and partly
objective. Its resolution would depend on such factors as, but not necessarily confined to, the type,
extent and purpose of the penalty, the nature of the obligation, the mode of breach and its
consequences, the supervening realities, the standing and relationship of the parties, and the like,
the application of which, by and large, is addressed to the sound discretion of the court. In Rizal
Commercial Banking Corp. vs. Court of Appeals,14 just an example, the Court has tempered the
penalty charges after taking into account the debtor’s pitiful situation and its offer to settle the
entire obligation with the creditor bank. The stipulated penalty might likewise be reduced when a
partial or irregular performance is made by the debtor. 15 The stipulated penalty might even be
deleted such as when there has been substantial performance in good faith by the obligor, 16 when
the penalty clause itself suffers from fatal infirmity, or when exceptional circumstances so exist as
to warrant it.17

The Court of Appeals, exercising its good judgment in the instant case, has reduced the penalty
interest from 5% a month to 3% a month which petitioner still disputes. Given the circumstances,
not to mention the repeated acts of breach by petitioners of their contractual obligation, the Court
sees no cogent ground to modify the ruling of the appellate court..

Anent the stipulated interest of 15.189% per annum, petitioners, for the first time, question its
reasonableness and prays that the Court reduce the amount. This contention is a fresh issue that
has not been raised and ventilated before the courts below. In any event, the interest stipulation,
on its face, does not appear as being that excessive. The essence or rationale for the payment of
interest, quite often referred to as cost of money, is not exactly the same as that of a surcharge or
a penalty. A penalty stipulation is not necessarily preclusive of interest, if there is an agreement to
that effect, the two being distinct concepts which may separately be demanded. 18 What may
justify a court in not allowing the creditor to impose full surcharges and penalties, despite an
express stipulation therefor in a valid agreement, may not equally justify the non-payment or
reduction of interest. Indeed, the interest prescribed in loan financing arrangements is a
fundamental part of the banking business and the core of a bank's existence. 19

Petitioners next assail the award of 10% of the total amount of indebtedness by way of attorney's
fees for being grossly excessive, exorbitant and unconscionable vis-a-vis the time spent and the
extent of services rendered by counsel for the bank and the nature of the case. Bearing in mind

25
that the rate of attorney’s fees has been agreed to by the parties and intended to answer not only
for litigation expenses but also for collection efforts as well, the Court, like the appellate court,
deems the award of 10% attorney’s fees to be reasonable.

Neither can the appellate court be held to have erred in rejecting petitioners' call for a new trial or
to admit newly discovered evidence. As the appellate court so held in its resolution of 14 May
1999 -

"Under Section 2, Rule 52 of the 1997 Rules of Civil Procedure, no second

motion for reconsideration of a judgment or final resolution by the same party
shall be entertained. Considering that the instant motion is already a second
motion for reconsideration, the same must therefore be denied.

"Furthermore, it would appear from the records available to this court that the
newly-discovered evidence being invoked by defendants-appellants have
actually been existent when the case was brought on appeal to this court as well
as when the first motion for reconsideration was filed.1âwphi1 Hence, it is quite
surprising why defendants-appellants raised the alleged newly-discovered
evidence only at this stage when they could have done so in the earlier pleadings
filed before this court.

"The propriety or acceptability of such a second motion for reconsideration is not

contingent upon the averment of 'new' grounds to assail the judgment, i.e.,
grounds other than those theretofore presented and rejected. Otherwise,
attainment of finality of a judgment might be stayed off indefinitely, depending on
the party’s ingenuousness or cleverness in conceiving and formulating 'additional
flaws' or 'newly discovered errors' therein, or thinking up some injury or prejudice
to the rights of the movant for reconsideration."20

At any rate, the subsequent execution of the real estate mortgage as security for the existing loan
would not have resulted in the extinguishment of the original contract of loan because of novation.
Petitioners acknowledge that the real estate mortgage contract does not contain any express
stipulation by the parties intending it to supersede the existing loan agreement between the
petitioners and the bank.21 Respondent bank has correctly postulated that the mortgage is but an
accessory contract to secure the loan in the promissory note.

Extinctive novation requires, first, a previous valid obligation; second, the agreement of all the
parties to the new contract; third, the extinguishment of the obligation; and fourth, the validity of
the new one.22 In order that an obligation may be extinguished by another which substitutes the
same, it is imperative that it be so declared in unequivocal terms, or that the old and the new
obligation be on every point incompatible with each other. 23 An obligation to pay a sum of money
is not extinctively novated by a new instrument which merely changes the terms of payment or
adding compatible covenants or where the old contract is merely supplemented by the new one.24
When not expressed, incompatibility is required so as to ensure that the parties have indeed
intended such novation despite their failure to express it in categorical terms. The incompatibility,
to be sure, should take place in any of the essential elements of the obligation, i.e., (1) the juridical
relation or tie, such as from a mere commodatum to lease of things, or from negotiorum gestio to
agency, or from a mortgage to antichresis,25 or from a sale to one of loan;26 (2) the object or
principal conditions, such as a change of the nature of the prestation; or (3) the subjects, such as
the substitution of a debtor27 or the subrogation of the creditor. Extinctive novation does not

26
necessarily imply that the new agreement should be complete by itself; certain terms and
conditions may be carried, expressly or by implication, over to the new obligation.

WHEREFORE, the petition is DENIED.

SO ORDERED.

G.R. No. L-48349 December 29, 1986

FRANCISCO HERRERA, plaintiff-appellant,

vs.
PETROPHIL CORPORATION, defendant-appellee.

Paterno R. Canlas Law Offices for plaintiff-appellant.

27
CRUZ, J.:

This is an appeal by the plaintiff-appellant from a decision rendered by the then Court of First
Instance of Rizal on a pure question of law. 1

The judgment appealed from was rendered on the pleadings, the parties having agreed during the
pretrial conference on the factual antecedents.

The facts are as follows: On December 5, 1969, the plaintiff-appellant and ESSO Standard
Eastern. Inc., (later substituted by Petrophil Corporation) entered into a "Lease Agreement"
whereby the former leased to the latter a portion of his property for a period of twenty (20) years
from said date, subject inter alia to the following conditions:

3. Rental: The LESSEE shall pay the LESSOR a rental of Pl.40 sqm. per month on 400 sqm. and
are to be expropriated later on (sic) or P560 per month and Fl.40 per sqm. per month on 1,693
sqm. or P2,370.21 per month or a total of P2,930.20 per month 2,093 sqm. more or less, payable
yearly in advance within the 1st twenty days of each year; provided, a financial aid in the sum of
P15,000 to clear the leased premises of existing improvements thereon is paid in this manner;
P10,000 upon execution of this lease and P5,000 upon delivery of leased premises free and clear
of improvements thereon within 30 days from the date of execution of this agreement. The portion
on the side of the leased premises with an area of 365 sqrm. more or less, will be occupied by
LESSEE without rental during the lifetime of this lease. PROVIDED FINALLY, that the Lessor is
paid 8 years advance rental based on P2,930.70 per month discounted at 12% interest per
annum or a total net amount of P130,288.47 before registration of lease. Leased premises shall
be delivered within 30 days after 1st partial payment of financial aid. 2

On December 31, 1969, pursuant to the said contract, the defendant-appellee paid to the
plaintfff-appellant advance rentals for the first eight years, subtracting therefrom the amount of
P101,010.73, the amount it computed as constituting the interest or discount for the first eight
years, in the total sum P180,288.47. On August 20, 1970, the defendant-appellee, explaining that
there had been a mistake in computation, paid to the appellant the additional sum of P2,182.70,
thereby reducing the deducted amount to only P98,828.03. 3

On October 14, 1974, the plaintiff-appellant sued the defendant-appellee for the sum of
P98,828.03, with interest, claiming this had been illegally deducted from him in violation of the
Usury Law. 4 He also prayed for moral damages and attorney's fees. In its answer, the
defendant-appellee admitted the factual allegations of the complaint but argued that the amount
deducted was not usurious interest but a given to it for paying the rentals in advance for eight
years. 5 Judgment on the pleadings was rendered for the defendant. 6

Plaintiff-appellant now prays for a reversal of that judgment, insisting that the lower court erred in
the computation of the interest collected out of the rentals paid for the first eight years; that such
interest was excessive and violative of the Usury Law; and that he had neither agreed to nor
accepted the defendant-appellant's computation of the total amount to be deducted for the eight
years advance rentals. 7

The thrust of the plaintiff-appellant's position is set forth in paragraph 6 of his complaint, which
read:

28
6. The interest collected by defendant out of the rentals for the first eight years was excessive and
beyond that allowable by law, because the total interest on the said amount is only P33,755.90 at
P4,219.4880 per yearly rental; and considering that the interest should be computed excluding
the first year rental because at the time the amount of P281, 199.20 was paid it was already due
under the lease contract hence no interest should be collected from the rental for the first year, the
amount of P29,536.42 only as the total interest should have been deducted by defendant from the
sum of P281,299.20.

The defendant maintains that the correct amount of the discount is P98,828.03 and that the same
is not excessive and above that allowed by law.

As its title plainly indicates, the contract between the parties is one of lease and not of loan. It is
clearly denominated a "LEASE AGREEMENT." Nowhere in the contract is there any showing that
the parties intended a loan rather than a lease. The provision for the payment of rentals in
advance cannot be construed as a repayment of a loan because there was no grant or
forbearance of money as to constitute an indebtedness on the part of the lessor. On the contrary,
the defendant-appellee was discharging its obligation in advance by paying the eight years rentals,
and it was for this advance payment that it was getting a rebate or discount.

The provision for a discount is not unusual in lease contracts. As to its validity, it is settled that the
parties may establish such stipulations, clauses, terms and condition as they may want to include;
and as long as such agreements are not contrary to law, morals, good customs, public policy or
public order, they shall have the force of law between them. 8

There is no usury in this case because no money was given by the defendant-appellee to the
plaintiff-appellant, nor did it allow him to use its money already in his possession. 9 There was
neither loan nor forbearance but a mere discount which the plaintiff-appellant allowed the
defendant-appellee to deduct from the total payments because they were being made in advance
for eight years. The discount was in effect a reduction of the rentals which the lessor had the right
to determine, and any reduction thereof, by any amount, would not contravene the Usury Law.

The difference between a discount and a loan or forbearance is that the former does not have to
be repaid. The loan or forbearance is subject to repayment and is therefore governed by the laws
on usury. 10

To constitute usury, "there must be loan or forbearance; the loan must be of money or something
circulating as money; it must be repayable absolutely and in all events; and something must be
exacted for the use of the money in excess of and in addition to interest allowed by law." 11

It has been held that the elements of usury are (1) a loan, express or implied; (2) an
understanding between the parties that the money lent shall or may be returned; that for such
loan a greater rate or interest that is allowed by law shall be paid, or agreed to be paid, as the
case may be; and (4) a corrupt intent to take more than the legal rate for the use of money loaned.
Unless these four things concur in every transaction, it is safe to affirm that no case of usury can
be declared. 12

Concerning the computation of the deductible discount, the trial court declared:

As above-quoted, the 'Lease Agreement' expressly provides that the lessee (defendant) shag pay
the lessor (plaintiff) eight (8) years in advance rentals based on P2,930.20 per month discounted
at 12% interest per annum. Thus, the total rental for one-year period is P35,162.40 (P2,930.20

29
multiplied by 12 months) and that the interest therefrom is P4,219.4880 (P35,162.40 multiplied by
12%). So, therefore, the total interest for the first eight (8) years should be only P33,755.90
(P4,129.4880 multiplied by eight (8) years and not P98,828.03 as the defendant claimed it to be.

The afore-quoted manner of computation made by plaintiff is patently erroneous. It is most

seriously misleading. He just computed the annual discount to be at P4,129.4880 and then simply
multiplied it by eight (8) years. He did not take into consideration the naked fact that the rentals
due on the eight year were paid in advance by seven (7) years, the rentals due on the seventh
year were paid in advance by six (6) years, those due on the sixth year by five (5) years, those
due on the fifth year by four (4) years, those due on the fourth year by three (3) years, those due
on the third year by two (2) years, and those due on the second year by one (1) year, so much so
that the total number of years by which the annual rental of P4,129.4880 was paid in advance is
twenty-eight (28), resulting in a total amount of P118,145.44 (P4,129.48 multiplied by 28 years) as
the discount. However, defendant was most fair to plaintiff. It did not simply multiply the annual
rental discount by 28 years. It computed the total discount with the principal diminishing month to
month as shown by Annex 'A' of its memorandum. This is why the total discount amount to only P
8,828.03.

The allegation of plaintiff that defendant made the computation in a compounded manner is
erroneous. Also after making its own computations and after examining closely defendant's
Annex 'A' of its memorandum, the court finds that defendant did not charge 12% discount on the
rentals due for the first year so much so that the computation conforms with the provision of the
Lease Agreement to the effect that the rentals shall be 'payable yearly in advance within the 1st
20 days of each year. '

We do not agree. The above computation appears to be too much technical mumbo-jumbo and
could not have been the intention of the parties to the transaction. Had it been so, then it should
have been clearly stipulated in the contract. Contracts should be interpreted according to their
literal meaning and should not be interpreted beyond their obvious intendment. 13

The plaintfff-appellant simply understood that for every year of advance payment there would be a
deduction of 12% and this amount would be the same for each of the eight years. There is no
showing that the intricate computation applied by the trial court was explained to him by the
defendant-appellee or that he knowingly accepted it.

The lower court, following the defendant-appellee's formula, declared that the plaintiff-appellant
had actually agreed to a 12% reduction for advance rentals for all of twenty eight years. That is
absurd. It is not normal for a person to agree to a reduction corresponding to twenty eight years
advance rentals when all he is receiving in advance rentals is for only eight years.

The deduction shall be for only eight years because that was plainly what the parties intended at
the time they signed the lease agreement. "Simplistic" it may be, as the Solicitor General
describes it, but that is how the lessor understood the arrangement. In fact, the Court will reject
his subsequent modification that the interest should be limited to only seven years because the
first year rental was not being paid in advance. The agreement was for a uniform deduction for the
advance rentals for each of the eight years, and neither of the parties can deviate from it now.

On the annual rental of P35,168.40, the deducted 12% discount was P4,220.21; and for eight
years, the total rental was P281,347.20 from which was deducted the total discount of P33,761.68,
leaving a difference of P247,585.52. Subtracting from this amount, the sum of P182,471.17
already paid will leave a balance of P65,114.35 still due the plaintiff-appellant.

30
The above computation is based on the more reasonable interpretation of the contract as a
whole rather on the single stipulation invoked by the respondent for the flat reduction of
P130,288.47.

WHEREFORE, the decision of the trial court is hereby modified, and the defendant-appellee
Petrophil Corporation is ordered to pay plaintiff-appellant the amount of Sixty Five Thousand One
Hundred Fourteen pesos and Thirty-Five Centavos (P65,114.35), with interest at the legal rate
until fully paid, plus Ten Thousand Pesos (P10,000.00) as attorney's fees. Costs against the
defendant-appellee.

SO ORDERED.

31